Income tax rates

The Senate Standing Committee on Finance has suggested an increase in the income tax rates that, as per the Federal Board of Revenue (FBR), would generate an additional 20 billion rupees. This proposal is fully supported by Business Recorder as the reduced income tax rates, announced by Prime Minister Shahid Khaqan Abbasi, flanked by the architect Miftah Ismail, three weeks before the budget was announced in parliament and eight weeks before the end of the current administration's tenure, was widely seen as blatant pre-poll rigging. The new suggested rates by the Committee are as follow: 10 percent on those with an income up to 1.2 million rupees (against the Abbasi announcement of 5 percent), 15 percent on those earning from 1.2 million to 2.4 million rupees per month (against the 10 percent proposed by Abbasi) and 25 percent on those earning 4.8 million rupees and above against Abbasi's proposal of 15 percent.
Be that as it may, the probability of implementation of these tax relief measures is considered to be extremely low as caretakers would be installed by 1 June and even if they refrained from taking measures to raise revenue as it is not within their mandate, (given the likelihood of a much higher than the Ismail-led Finance Ministry's grossly understated budget deficit projection for 2017-18), yet the next elected government to be installed by August if elections are held on time, would be compelled to reverse some of these revenue lowering measures. Critics also maintain that in the event that the PML-N is re-elected, it too would be hard-pressed to ensure the implementation of these tax relief measures even if Ismail himself pulls a rabbit out of the hat and is the PML-N's choice of Finance Minister.
Additionally, the income tax relief measures would not be implemented prior to 1 July 2018, which would necessitate that they be made part of the Finance Bill 2018. This fact alone fuelled the general perception that the overarching objective of the early announcement was to increase Prime Minister Abbasi's personal popularity. Unfortunately, the move backfired as the salaried class in this country is not only largely literate but mainly resident in cities with exposure to independent media analyses and therefore public debate has remained centred on the fact that the highest income group, earning above 4.8 million rupees per month, would pay only 15 percent income tax as per these measures.
According to calculations made by the FBR, the total negative impact on revenue of this measure was 90 billion rupees and, if the Committee's proposals are accepted, the negative impact would shrink to 70 billion rupees, still a sizeable amount. It is relevant to note that Ismail's total tax incentive package amounted to negative 184 billion rupees while his revenue generating measures were projected to increase revenue by 93 billion rupees leaving the treasury short by 91 billion rupees in the forthcoming fiscal year 2018-19. Ismail defended his claim that tax revenue would nonetheless rise by 13.4 percent, in spite of being aware of FBR's calculations, by employing rather dubious economic logic: growth, he argued, would raise tax revenue. This is true for developed countries but, unfortunately, not true for Pakistan as the linkage between growth and higher revenue has never been established in this country. Revenue did rise dramatically during the tenure of the Dar-led Finance Ministry but the reason was the levy of ever-rising tax rates and the levy of withholding tax, in the sales tax mode, on an increasing number of products and services, and deceitfully crediting it under income tax.
To conclude, the budget 2018-19 proposals (expenditure and revenue) being implemented by subsequent governments even after it is passed by parliament is unlikely, a fact known to its architect Ismail. The entire budget exercise was at an estimated cost of between 30 to 40 million rupees and was undertaken at a time when the country could simply not afford it and one would hope that due notice is taken of this by the successive government.